Full Judgment Text
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PETITIONER:
RAJAPALAYAM MILLS LTD.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX, MADRAS
DATE OF JUDGMENT06/10/1978
BENCH:
BHAGWATI, P.N.
BENCH:
BHAGWATI, P.N.
TULZAPURKAR, V.D.
PATHAK, R.S.
CITATION:
1979 AIR 117 1979 SCR (1)1138
1978 SCC (4) 322
CITATOR INFO :
MV 1985 SC 421 (5)
F 1991 SC1322 (17)
ACT:
Income Tax Act, 1922, Sec. 15C and Sec. 84 of Income
Tax Act, 1961, interpretation of.
HEADNOTE:
The appellant assessee, a public limited company
carrying on business in manufacture and sale of yarn, set up
a new industrial undertaking during the financial year
ending 31st March, 1959 being the accounting year relevant
to the assessment year 1959-60. The entire amount of
depreciation and development rebate in respect of this new
unit for the assessment years 1959-60 and 1960-61 were set
off against the total profit of the assessee arising out of
all units old and new, and therefore nothing remained
unabsorbed to be carried forward to the next assessment year
1961-62. In the assessment year 1961-62 the assessee earned
a net business income of Rs. 12,69,403/- which included a
sum of Rs. 1,36,822/- representing the income from the new
unit. The assessee in its assessment to tax for this
assessment year claimed exemption of the income from the new
unit to the extent of 6% of the average capital employed in
it under section 15C of the Income Tax Act 1922. Taking the
view that the benefit of Sec. 15(c) sub-section (1) could be
claimed by the assessee only if there was any profit derived
from the new unit and since the profit was, by reason of
sub-section (3) of Sec. 15C required to be computed in
accordance with the trading result of the new unit without
reference to any other activity carried on by the assessee
and if that was done, the result would clearly show that
there was a loss in the working of the new unit in the
assessment year 1961-62, the Income Tax Officer held that
the benefit of exemption under Sec. 15C, sub-section (1) was
not available to the assessee and thus the claim of the
assessee for exemption was rejected. In appeal, the
Appellate Assistant Commissioner set aside the order of the
Income Tax Officer but on further appeal by the Revenue to
the Tribunal the order of the Income Tax Officer was
restored. The same view was taken by the Tribunal in regard
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to the assessment in the year 1962-63. The High Court, on a
reference, agreed with the view taken by the Tribunal. Hence
the appeals by special leave in respect of the assessment
years 1961-62 and 1962-63.
Allowing the appeals, the Court,
^
HELD: (1) The law of income tax in a modern society is
intended to achieve various social and economic objectives
and is used as an instrument for accelerating economic
growth and development. Sec. 15C is a provision introduced
in the Indian Income Tax Act, 1922 with a view to carrying
out this objective and it is calculated to encourage setting
up of new industrial undertakings. [1147 A-B]
Sub-section (1) of Sec. 15C exempts from tax so much of
the profits or gains derived from a new industrial
undertaking as do not exceed 6% per annum of the capital
employed in the undertaking and, therefore, there must
1139
be profits or gains derived from the new industrial
undertaking in the assessment year in question before any
claim for exemption can be sustained under Sec. 15C, sub-
sec. (1). If there are no profits or gains derived from the
new industrial undertaking in any particular assessment
year, there can be no question of any exemption, because it
is only where there are such profits or gains that to the
extent of 6% per annum of the capital employed, they become
eligible for exemption [1147 B, C-D]
(2) Though the profits of each distinct business
carried on by an assessee have to be computed separately, in
accordance with the provisions of Sec. 10, the tax is
chargeable under that section not separately on the profits
of each business, but on the aggregate of the profits of all
the business carried on by the assessee. Therefore, where
the assessee carries on several he is entitled under section
10 to set off loss in one business against profits of
another. If there is any loss in a business carried on by
the assessee by reason of the profits of such business not
being sufficient to absorb the depreciation allowance, such
loss can be set off against the profits of another business
carried on by the assessee. If, however there are no profits
chargeable under the head ’Business or profession’ or if the
profits chargeable under that head are insufficient to cover
the depreciation allowance, the amount of the allowance to
the extent to which it is not absolved can be set off
against profits chargeable under any other head for the
assessment year. This is the plain and undoubted effect of
Section 24 sub-section (1). [1148 A-E]
Anglo-French Textile Co. Ltd. v. Commissioner of Income
Tax, 23 ITR 82 at 86; Commissioner of Income Tax v. Indo-
Mercantile Bank Ltd., 36 ITR 1 at 6; at 6; Commissioner of
Income Tax v. Muthuraman Chettiar 44 ITR 710 at 713 referred
to.
(3) It is clear on a plain reading of the language of
proviso (b) to clause (vi) of Section 10 of the Act, that it
comes into operation only where full effect cannot be given
to the depreciation allowance for the assessment year in
question owing to there being no profits or gains chargeable
for that year or profits or gains chargeable being less than
the depreciation allowance. [1149 B-C]
(4) The words ’no profits or gains chargeable for that
year’ are not confined to profits and gains derived from the
business whose income is being computed under section 10,
but they refer to the totality of the profits or gains
computed under the various heads and chargeable to tax. It
is, therefore, clear that effect must be given to
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depreciation allowance first against the profits or gains of
the particular business whose income is being computed under
section 10 and if the profits of that business are not
sufficient to absorb the depreciation allowance, the
allowance to the extent to which it is not absorbed would be
set off against the profits of any other business and if a
part of the depreciation allowance still remains unabsorbed,
it would be liable to be set off against the profits or
gains chargeable under any other head and it its only if
some part of the depreciation allowance still remains
unabsorbed that it can be carried forward to the next
assessment year. Obviously, therefore, there would be no
scope for the applicability of proviso (b) to clause (vi) if
the total income of the assessee chargeable to tax is
sufficient to absorb the depreciation allowance, for then
there would not be any unabsorbed depreciation allowance to
be carried forward to the following assessment year. But
where any part of
1140
the depreciation allowance remains unabsorbed after being
set off against the total income chargeable to tax, it can
be carried forward under proviso (b) to clause (vi) to the
following year and set off against that year’s income and so
on for succeeding years. The method adopted by the statute
for achieving this result is that the carried forward
depreciation allowance is deemed to be part of and stands on
exactly the same footing as, the current depreciation for
the assessment year and is this allowable as a deduction
under clause (vi). Therefore, when the profits or gains of a
business for a particular assessment year are to be computed
under Sec. 10, the current depreciation allowance for the
assessment year in question is deductible under clause (vi)
but the depreciation allowance of the preceding years would
be liable to be taken into account only if, and to the
extent to which, it is not absorbed by the total income of
the assessee computed under different heads and chargeable
to tax for those assessment years. [1149 D-H, 1150 A-B]
Commissioner of Income Tax v. Jaipuria China Clay
Mines, 59 ITR 555 followed.
(5) Though the amount of the development rebate is,
under the main provisions in sub-clause (ii) of clause (vi-
b), allowable in the first instance against the profits or
gains of the particular business whose profits or gains are
being computed, clause (i) of Explanation (1) makes it clear
that if any part of the development rebate remains
unabsorbed, it is to be set off against the other income of
the assessee under any of the chargeable heads and it is
only if some part of the development rebate still remains
outstanding that it can be carried forward to the following
assessment year and set off against the total income of the
assessee for that year. The amount of the development rebate
is to be set off against the total income of the assessee
and not merely against the profits or gains of the
particular business in respect of which the development
rebate is granted and so also the development rebate which
remains unabsorbed and is carried forward to the next
assessment year is by reason of clause (ii) of Explanation 1
to be set off not merely against the profits or gains of the
particular business but against the total income of the
assessee for that year. Therefore it is only where the
amount of development rebate has not been fully set off
against the total income of the assessee in the past
assessment years and a part of it still remains unabsorbed
and is carried forward to the assessment year in question
that it can be allowed against the profits or gains of the
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business for the particular assessment year and if there is
still is some balance outstanding, then against the other
income of the assessee for that assessment year. But if the
amount of the development rebate is wholly set off against
the total income of the assessee in the past assessment
years and there is no unabsorbed development rebate to be
carried forward to the assessment year in question, there
would be nothing in respect of the past development rebate
to be set off against the profits or gains of the business
under clause (ii) of Explanation 1. [1151 D-H, 1152 A-B]
(6) As sub-section (3) of Sec. 15C provides that the
profits or gains of a new industrial undertaking shall be
computed under Sec. 10, and therefore, according to clause
(vi) read with proviso (b), no part of depreciation
allowance and according to clause (vi-b) Explanation 1, no
part of the development rebate in respect of the new
industrial undertaking for the past assessment years can be
allowed as a deduction in computing the profits and gains,
unless
1141
it has remained unabsorbed by reason of inadequacy of the
total income chargeable to tax in the post assessment years,
and is carried forward to the assessment year in question.
Total income means not only profits or gains derived from
the new industrial undertaking but the totality of profits
or gains computed under various heads.[1152 F-G]
(7) There is nothing in sub-section (3) of Sec. 15C or
in any other provision of the Act which requires that in
computing the profits or gains of a new industrial
undertaking under section 10, depreciation allowance or
development rebate in respect of the new industrial
undertaking for the past assessment years should be taken
into account. even if it has been set off fully against
the profits or gains of any other business carried on by the
aesessee or against income under any other head and there is
no unabsorbed depreciation allowance or development rebate
to be carried forward. [1152 G-H, 1153 A]
(8) Effect cannot be given to depreciation allowance
and development rebate twice over, once in the past
assessment years and again in the assessment year in
question. To give effect to depreciation allowance or
development rebate for the past assessment years even
though it has been set off and absorbed completely against
the total income of the assessee for those assessment years
would be to allow a deduction not warranted by any provision
of the Act and indeed it would be going contrary to the
express provision of proviso (b) to clause (vi) and
Explanation 1 to clause (vi-b). Sub-section (3) of Sec. 15C
clearly does not have any such effect. What it does is no
more than provide as to how "the profits or gains derived
from new industrial undertaking" referred to in sub-section
(i) of Section 15C shall be computed. [1153 A-D]
(9) Sub-section (3) of Sec. 15C does not enact any
legal fiction providing that the profits or gains of the
now industrial undertaking shall be computed as if the new
industrial undertaking were the only business of the
assessee from the date of its establishment or the past
years depreciation or development rebate had not been set
off against other income of the assessee The new industrial
undertaking is not retrospectively quarantined or isolated
from the other income producing activities of the assesee
for determining its profits or gains for the purpose of
applicability of sub-section (1) of section 15C. What sub-
section (3) of section 15C does is meanly to lay down the
same rule of computations for the profits or gains of a new
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industrial undertaking as in respect of any other business
and, therefore, neither depreciation allowance nor
development rebate in respect of the new industrial
undertaking for the past assessment year can be allowed as a
deduction in computing the profits or gains for the
assessment year in question, except where and to the extent
to which, it has not been set off against the total income
of the assessee for those assessment years and has remained
unabsorbed. This is the plain and undoubted effect of the
language used in sub-section (3) of section 15C. Indeed the
language is so clear and unambiguous that it is impossible
to place any other construction upon it. [1153 E-H 1154
A]
(10) Apart from the language of the section, if the
construction contended for on behalf of the Revenue and
upheld by the High Court. as well as the Tribunal were
accepted, it would lead to the highly anomalous result that
though, for the purpose of computing the total income
chargeable to tax. the depreciation allowance and
development rebate which have been set off against
1142
the other income of the assessee for the past assessment
years would not be liable to be taking into account, they
would have to be deducted in computing the profits or gains
of the business for the purpose of applicability of
subsection (1) of Section 15C. Thus, there would be two
different modes of determining the profits or gains of the
business, one for computing the total income chargeable to
tax and the other for applying the provisions of subsection
(1) of Section 15C. Such a consequence could never have been
intended by the legislature [1154 A-C]
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 1989
and 2418/77.
From the Judgments and orders dated 3-1-1970 and 18-1-
1973 of the Madras High Court in Tax Case Nos. 112 of 1966
and 84 of 1971 respectively.
T. A. Ramachandra for the Appellant in C.A.1989 and
Inter-vener-Sepapati Whitely.
P. A. Francis and Miss A. Subhashini for the Respondent
in C.A. 1969/72
Devi Pal, S. Swarup and J. B. Dadachanji for the
Intervener (The Indian Aluminium Co. in C.A. 1989/72.
J. Ramamurthi and Miss R. Vaigai for the Appellant in
C.A. 2418/77.
B. B. Ahuja and Miss A. Subhashini for the Respondent
in C.A. 2418/77.
R. N. Bajoria, P. V. Kapur, U. K. Khaitan, Praveen
Kumar and R. K. Chaudhary for the Intervener (M/s Orient
Paper Mills Ltd.)
The Judgment of the Court was delivered by
BHAGWATI J., These two appeals by special leave raise a
short but interesting question of Law relating to the
interpretation of sections 15C of the Indian Income Tax Act,
1922 and section 84 of the Income Tax Act, 1961. These two
sections are in material respects in identical terms and the
interpretation we place on section 15C is bound to apply
equally to section 84. We will, therefore, first deal with
Civil Appeal 1989 of 1972 which involves the interpretation
of section 15C and then turn to Civil Appeal 2418 of 1977
which deals with section 84.
The assessee in Civil Appeal 1989 of 1972 is a public
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limited company carrying on business in manufacture and sale
of yarn. During the financial year ending 31st March, 1959,
being the accounting year relevant to the assessment year
1959-60, the assessee set up a new industrial undertaking
which admittedly satisfied the requirement of section 15C(2)
of the Indian Income Tax Act, 1922. The profit,
1143
depreciation and development rebate in respect of this new
unit for the assessment years 1959-60 and 1960-61 were as
follows:
Year Profit Depreciation and
Development Rebate
1959-60 Rs. 33,118/- Rs. 1,44, 361/-
Rs. 5,07, 336/-(Development
rebate)
1960-61 Rs. 3,64, 672/- Rs. 3,19, 591/-
Rs. 1,17, 205/-(Development
rebate)
----------------------------------------------
Rs. 3, 97, 790/- Rs. 10, 88,493/-
In the assessment year 1959-60 the total profit of the
assessee in respect of its old and new units came to Rs.
2,42,432/-, including Rs. 33,118/- in respect of the new
unit and the total depreciation amounted to Rs. 2,66,651
including Rs. 1,44,361 in respect of the new unit and after
setting off the amount of depreciation against the total
profit, a sum of Rs.24,183/-remained as unabsorbed
depreciation which was carried forward to the next year. The
entire development rebate which included Rs. 5,07,336/- in
respect of the new unit, also remained unabsorbed owing to
the smallness of the profit and that too had to be carried
forward. The total profit of the assessee in respect of its
old and new units for the assessment year 1960-61 was Rs.
14,13,604/- inclusive of Rs 3,64,672/- in respect of the new
unit and this was large enough to absorb the carried forward
depreciation and development rebate as also the current
year’s depreciation and development rebate in respect of
both the units. In fact, after setting off of such
depreciation and development rebate, a sum of Rs. 3,25,176/-
remained as the taxable income of the assessee and it was
assessed to tax in its hands. The result was that no part of
the depreciation or development rebate for the assessment
years 1959-60 and 1960-61 remained unabsorbed to be carried
forward to the next assessment year 1961-62.
The position in the assessment year 1961-62 was that
the assessee earned a net business income of Rs. 12,69,403/-
which included sum of Rs. 1,36,822/- representing the income
from the new unit. The assessee in its assessment to tax for
this assessment year claimed exemption of the income from
the new unit to the extent of 6% of the average capital
employed in it under section 15C. This section insofar as
material read as follows:
(1) Save as otherwise hereinafter provided, the
tax shall not be payable by an assessee on so
much of the profits or gains derived from any
industrial undertaking (or hotel) to which
this section applies as do not exceed six per
cent per annum on the capital
1144
employed in the undertaking (or hotel),
computed in accordance with such rules as may
be made in this behalf by the Central Board
of Revenue.
(2) x x x x x x
(3) The profits or gains of an industrial
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undertaking (or a hotel) to which this
section applies shall be computed in
accordance with the provisions of section 10.
(4) The tax shall not be payable by a shareholder
in respect of so much of any dividend paid or
deemed to be paid to him by an industrial
undertaking (or a hotel) as is attributable
to that part of the profits or gains on which
the tax is not payable under this section.
(EXPLANATION-The amount of dividend in
respect of which the tax is not payable under
this sub section shall be computed in
accordance with such rules as may be made in
this behalf by the Central Board of
Revenue.)
(5) x x x x x x
(6) The provisions of this section (shall, in
relation to an industrial undertaking, apply)
to the assessment for the financial year next
following the previous year in which the
assessee begins to manufacture or produce
articles and for the four assessments
immediately succeeding).
The Income-Tax Officer took the view that the benefit of
section 15C, sub-section (1) could be claimed by the
assessee only if there was any profit derived from the new
unit and since this profit was, by reason of sub-section (3)
of section 15C, required to be computed in accordance with
the provisions of section 10, it was necessary to work out
the trading result of the new unit without reference to any
other activity carried on by the assessee and if that was
done, the result would clearly show there was a loss in the
working of the new unit in the assessment year 1961-62. The
computation made by the Income Tax Officer was as under. The
total depreciation and development rebate in respect of the
new unit for the assessment years 1959-60 and 1960-61 was
Rs. 10,88,493/-, while the profit for these two assessment
years came to only Rs. 3,97,790/- so that, taking, into
account only the trading result of the new unit as that was
the only source or income of the assessee during the
assessment years 1959-60 and 1960-61, a sum of Rs.
6,90,703/- representing
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the excess of depreciation and development rebate over
profit remained unabsorbed to be carried forward to the next
assessment year 1961-62. If this carried forward
depreciation and development rebate amounting to Rs.
6,90,703/- were allowed against the profit of Rs. 1,36,822/-
derived from the new unit in the assessment year 1961-62,
there would be a resultant loss and hence the benefit of the
exemption under section 15C, sub-section (1) was held not
available to the assessee and the claim of the assessee for
exemption was rejected.
The assessee carried the matter in appeal and before
the Appellate Assistant Commissioner, the assesses succeeded
in making good its claim for exemption under section 15C,
sub-section (1). The Appellate Assistant Commissioner
pointed out in a brief but precise order: "The loss of Rs.
6,90,703/- being depreciation in excess of the income made
by the new mill was set off against the income of the old
mill in both the years and the net result for the assessment
year 1960-61 was a positive figure which was assessed to
tax. There is no question of once again carrying forward the
depreciation of the new mill to the assessment year 1961-62
and allowing it against the income of the new mill. It is
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only when there is a loss of the earlier year due to
depreciation attributable to the new industrial undertaking
which could not be set off against the profits of the
earlier years, it has to be carried forward and set off
against the income of the current year in working out the
income liable to tax under section 10". The Appellate
Assistant Commissioner accordingly allowed the claim for
exemption and directed the Income Tax Officer to modify the
assessment in conformity with his decision.
The Revenue being aggrieved by the decision of the
Appellate Assistant Commissioner preferred an appeal before
the Income Tax Appellate Tribunal. The appeal was successful
and the Tribunal set aside the order of the Appellate
Assistant Commissioner and restored that of the Income Tax
Officer. The Tribunal took the view that the trading result
of the new unit must be considered as if it stood by itself,
ignoring every other income producing activity of the
assesse and if that was done, it was clear that there was an
unabsorbed depreciation and development rebate of Rs.
6,90,703/- in respect of the new unit which was required to
be carried forward and treated as part of the allowance for
the assessment year 1961-62 and that would wholly wipe out
the profit of Rs. 1,36,822/- leaving a resultant loss in the
new unit for the assessment years 1961-62. The Tribunal in
this view held that the benefit of the exemption under
section 15C, sub-section (1) was not available and the
Income Tax officer was justified in refusing to grant such
exemption.
1146
This led to the filing of an application for reference
by the assessee and on the application, the Tribunal stated
a case and referred the following question of law for the
opinion of the High Court.
"Whether on the facts and in the circumstances of
the case the assessee company was entitled to the
relief under section 15C(2)".
The High Court agreed with the view taken by the Tribunal
and proceeding on the assumption that for the purpose of
determining the applicability of section 15C, sub-section
(1), the new unit was required to be treated in isolation,
as if no other income producing activity was carried on by
the assessee, the High Court observed that there was
unabsorbed depreciation and development rebate of Rs.
6,90,703/- in respect of the new unit which was required to
be carried forward and set off against the profit of Rs.
1,36,822/- derived from the new unit in the assessment year
1961-62 and since that left the new unit in a resultant
position of loss, the assessee was not entitled to claim the
benefit of the exemption under section 15C, sub-section (1).
The High Court accordingly answered the question referred by
the Tribunal in favour of the Revenue and against the
assessee. The assessee thereupon preferred the present Civil
Appeal No. 1989 of 1972 after obtaining certificate of
fitness from the High Court.
The same question also arose in the assessment of the
assessee to tax for the assessment year 1962-63, but in this
assessment year the law in force was the Income Tax Act,
1961 which had come into force with effect from 1st April,
1962. The corresponding provision in section 84 of the new
Act was however, in material respects in the same terms as
section 15C of the old Act. The claim for exemption made by
the assessee under section 84 for the assessment year 1962-
63 met with the same fluctuating vicissitudes of fortune as
the claim for the earlier assessment year and ultimately,
the Tribunal having decided against the assessee, a
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reference of the question whether on the facts and the
circumstances of the case the assessee was entitled to
exemption under section 84 was made to the High Court. The
High Court in view of its decision for the earlier
assessment year, decided against the assessee and hence, the
present Civil Appeal No. 2418 of 1977 was brought by the
assessee after obtaining certificate of fitness from the
High Court. Since both sections 15C and 84 are, for all
material purposes, in identical terms, we will discuss the
interpretation and applicability of section 15C in Civil
Appeal No. 1989 of 1972 and the view we take in that appeal
with equally govern the decision of Civil Appeal No. 2418 of
1977.
1147
The law of income tax in a modern society is intended
to achieve various social and economic objectives. It is
often used as an instrument for accelerating economic growth
and development. Section 15C is a provision introduced in
the Indian Income Tax Act, 1922 with a view to carrying out
this objective and it is calculated to encourage setting up
of new industrial undertakings in the country. Sub-section
(1) of this section exempts from tax so much of the profits
or gains derived from a new industrial undertaking as do not
exceed 6% per annum of the capital employed in the
undertaking. There are rules made under the Act for
computing the capital employed in a new industrial
undertaking but we are not concerned with these rules in the
present appeals. What is material is only the provision for
exemption and according to this provision, the profits and
gains of a new industrial undertaking are exempt from tax to
the extent of 6% per annum of the capital employed, and
obviously, therefore there must be profits or gains derived
from the new industrial undertaking in the assessment year
in question before any claim for exemption can be sustained
under section 15C, sub-section (1). If there are no profit
or gains derived from the new industrial undertaking in any
particular assessment year, there can be no question of any
exemption, because it is only where there are such profits
or gains that to the extent of 6% per annum of the capital
employed, they become eligible for exemption. The first
question which must, therefore, arise for consideration in
every case where a claim for exemption is made under section
15C, sub-section(1) is whether there are any profits or
gains derived from the new industrial undertaking in the
assessment year in question, and if so, what is the quantum
of such profits or gains. Now, sub-section (3) of section
15C says that the profits or gains of a new industrial
undertaking shall be computed in accordance with the
provisions of section 10 and since under the income tax law,
every assessment year is a self-contained period, profits
and gains of the new undertaking must be computed for the
particular assessment year in respect of which the claim for
exemption is made, by applying the provisions of section 10.
Sub-section (2) of that section provides for various
allowances to be made in computing profits and gains of a
business and amongst such allowances are one in respect of
depreciation and the other in respect of development rebate.
Clause (vi) of sub-section (2) deals with allowance for
depreciation and it says that in computing the profits or
gains of a business allowance shall be made, in respect of
depreciation of building, machinery, plant or furniture
belonging to the assessee and used for the purpose of the
business, a sum equivalent to "such percentage on the
written down value thereof as may in any case or class of
cases be prescribed". Depreciation cal-
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1148
culated in accordance with the provisions of clause (vi) is
thus allowable in computing the profits and gains of a
business chargeable to tax and if the profits and gains of
the business are insufficient to absorb such depreciation
allowance, the amount of the allowance to the extent it is
unabsorbed, must, like any other business loss by set off
against the profits of any other business. It is settled law
that though the profits of each distinct business carried on
by an assessee have to be computed separately in accordance
with the provisions of section 10, the tax is chargeable
under that section not separately on the profits of each
business, but on the aggregate of the profits of all the
businesses carried on by the assessee. Vide Anglo-French
Textile Co. Ltd. v. Commissioner of Income-tax Commissioner
of Income tax v. Indo-Mercantile Bank Ltd. and Commissioner
of Income-tax v. Muthuraman Chettiar. It follows, therefore,
that where the assessee carries on several businesses, he is
entitled under section 10 to set off loss in one business
against profits in another. If there is any loss in a
business carried on by the asessee by reason of the profit
of another business carried by the assessee. If, however,
there are no profits chargeable under the head ’Business or
profession’ or if the profits chargeable under that head are
insufficient to cover the depreciation allowance, the amount
of the allowance to the extent to which it is not absorbed
can be set off against profits chargeable under any other
head for that assessment year. This is the plain and
undoubted effect of section 24, sub-section (1) as explained
in Commissioner of Income-tax v. Indo-Mercantile Bank Ltd.
(supra). But what would happen if still some part of the
depreciation allowance remains unabsorbed. The answer is
provided by proviso (b) to clause (vi) of section 10 which
reads as follows:
"Provided that-
(a) X X
X
(b) Where, (in the assessment of the assessee or
if the assessee is a registered firm, in the
assessment of its partners,) full effect
cannot be given to any such allowance in any
year (not being a year which ended prior to
the 1st day of April, 1939), owing to there
being no profits or gains chargeable for that
year or owing to the profits or gains
chargeable being less than
1149
the allowance, (then, subject to the
provisions of clause (b) of the proviso to
sub-section (2) of section 24), the allowance
or part of the allowance, to which effect has
not been given as the case may be, shall be
added to the amount of the allowance for
depreciation for the following year and
deemed to be part of that allowance or if
there is no such allowance for that year, be
deemed to be the allowance for that a year,
and so on for succeeding years:
It is clear on a plain reading of the language of proviso
(b) to clause (vi) that it comes into operation only where
full effect cannot be given to the depreciation allowance
for the assessment year in question owing to there being no
profits or gains chargeable for that year or profits or
gains chargeable being less than the depreciation allowance.
Now, it is well settled, as a result of the decision of this
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Court in Commissioner of Income-tax v. Jaipuria China Clay
Mines that the words ’no profits or gains chargeable for
that year’ are not confined to profits and gains derived
from the business whose income is being computed under
section 10, but they refer to the totality of the profits or
gains computed under the various heads and chargeable to
tax. It is, therefore, clear that effect must be given to
depreciation allowance first against the profits or gains of
the particular business whose income is being computed under
section 10 and if the profits of that business are not
sufficient to absorb the depreciation allowance, the
allowance to the extent to which it is not absorbed would be
set off against the profits of any other business and if a
part of the depreciation allowance still remains unabsorbed,
it would be liable to be set off against the profits or
gains chargeable under any other head and it is only if some
part of the depreciation allowance still remains unabsorbed
that it can be carried forward to the next assessment year.
Obviously, therefore, there would be no scope for the
applicability of proviso (b) to clause (vi) if the total
income of the assessee. chargeable to tax is sufficient to
absorb the depreciation allowance, for then there would not
be any unabsorbed depreciation allowance to be carried
forward to the following assessment year. But where any part
of the depreciation allowance remains unabsorbed after being
set off against the total income chargeable to tax, it can
be carried forward under proviso (b) to clause (vi) to the
following year and set off against that years’ income and so
on for succeeding years. The method adopted by the statute
for achieving this result is that the carried forward
depreciation allowance is deemed to be part of and stands on
exactly the same footing as, the current depreciation for
the assessment year and is thus
1150
allowable as a deduction under clause (vi). It would,
therefore, be seen that when the profits or gains of a
business for a particular assessment year are to be computed
under section 10, the current depreciation allowance for the
assessment year in question is deductible under clause (vi)
but the depreciation allowance of the preceding years would
be liable to be taken into account only if, and to the
extent to which, it is not absorbed by the total income of
the assessee computed under different heads and chargeable
to tax for those assessment years.
The position in regard to development rebate is the
same. The relevant provision in that behalf is to be found
in clause (vi-b) of sub-section (2) of section 10. That
clause, insofar as material, provides as follows:
"10(2). Such profits and gains shall be computed
after making the following allowances, namely,
(vi-b) in respect of new machinery or plant installed
after the 31st day of March, 1954, which is wholly used
for the purposes of the business carried on by the
assessee, a sum by way of development rebate in respect
of the year of the installation of the machinery or
plant, equivalent to,-
(i) . . .
(ii) in the case of machinery or plant installed
before the 1st day of April, 1961, twenty-
five per cent and in the case of machinery or
plant installed after 31st day of March,
1961, twenty per cent of the actual cost of
the machinery or plant to the assessee;
Explanation 1. In the case of machinery or plant
installed after the 31st day of December,
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1957, where the total income of the assessee
for the year of installation (the total
income for this purpose being computed
without making any allowance under this
clause) is nil or is less than the full
amount of the development rebate calculated
at the rate applicable thereto under this
clause,-
(i) the sum to be allowed by way of development
rebate for that year under this clause shall
be only such amount as is sufficient to
reduce the said total in come to nil; and
(ii) the amount of the development rebate, to the
extent to which it has not been allowed as
aforesaid, shall be
1151
carried forward to the following year, and
the development rebate to be allowed for the
following year shall be such amount as is
sufficient to reduce the total income of the
assessee for that year, computed in the
manner aforesaid, to nil, and the balance of
the development rebate, if any, still
outstanding shall be carried forward to the
following year and so on, so however that no
portion of the development rebate shall be
carried forward for more than eight years;
The amount of development rebate in respect of new machinery
used for the purpose of the business is allowable in the
year of installation of the machinery under sub-clause (ii)
of clause (vi-b), but Explanation (1) provides that if the
total income of the assessee for the year of installation is
nil or is less than the full amount of the development
rebate, the amount of the development rebate, to the extent
to which it is not absorbed, may be carried forward to the
following year and set off against the total income of the
assessee for that year and if even thereafter, a part of the
development rebate remains unabsorbed, the balance
outstanding may be carried forward to the following year and
so on for an aggregate period not exceeding eight years.
Though the amount of the development rebate is, under the
main provision in sub-clause (ii) of clause (vi-b),
allowable in the first instance against the profits or gains
of the particular business whose profits or gains are being
computed, clause (i) of Explanation (1) makes it clear that
if any part of the development rebate remains unabsorbed, it
is to be set off against the other income of the assessee
under any of the chargeable heads and it is only if some
part of the development rebate still remains outstanding
that it can be carried forward to the following assessment
year and set off against the total income of the assessee
for that year. The amount of the development rebate is to be
set off against the total income of the assessee and not
merely against the profits or gains of the particular
business in respect of which the development rebate is
granted and so also the development rebate which remains
unabsorbed and is carried forward to the next assessment
year is, by reason of clause (ii) of Explanation 1 to be set
off not merely against the profits or gains of the
particular business but against the total income of the
assessee for that year. It would, therefore, be seen that it
is only where the amount of development rebate has not been
fully set off against the total income of the assessee in
the past assessment years and a part of it still remains
unabsorbed and is carried forward to the assessment year in
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question that it can be allowed against the profits
1152
or gains of the business for the particular assessment year
and if there is still some balance outstanding, then against
the other income of the assessee for that assessment year.
But if the amount of the development rebate is wholly set
off against the total income of the assessee in the past
assessment years and there is no unabsorbed development
rebate to be carried forward to the assessment year in
question, there would be nothing in respect of the past
development rebate to be set off against the profit or gains
of the business under clause (ii) of Explanation 1. It is,
therefore, necessary, when the profits or gains of business
are being computed under section 10 to ask the question
whether the machinery in respect of which the development
rebate is admissible has been installed in the assessment
year in question, and if it is found that it has been
installed earlier, whether any part of the development
rebate has remained unabsorbed against the total income of
the assessee in the past assessment years and is carried
forward to the present assessment year. In a case where the
machinery is installed in an earlier assessment year, it is
only if the whole of the development rebate has not been
fully set off against the total income of the passessee in
the past assessment years and a part of it has remained
unabsorbed and is carried forward that it can be set off
against the profits or gains of the business for the
particular assessment year But if the whole of the
development rebate has been absorbed and no part of it is
carried forward, there can be no question of allowing it
against the profits’ or gains of the business for the
assessment year in question.
Now, sub-section (3) of section 15C provides that the
profits or gains of a new industrial undertaking shall be
computed under section 10 and, therefore, according to
clause (vi) read with proviso (b), no part of the
depreciation allowance and according to clause (vi-b)
Explanation 1, no part of the development rebate in respect
of the new industrial undertaking for the past assessment
years can be allowed as a deduction in computing the profits
and gains, unless it has remained unabsorbed by reason of
inadequacy of the total income chargeable to tax in the past
assessment years-and, as pointed out above, by total income
we mean not only profits or gains derived from the new
industrial undertaking but the totality of profit’s or gains
computed under various heads-and is carried forward to the
assessment year in question. There is nothing in sub-section
(3) of section 15C or in any other provision of the Act
which requires that in computing the profits or gains of a
new industrial undertaking under section 10, depreciation
allowance or development rebate in respect of the new
industrial undertaking for the past assessment years should
be taken into account, even if it has been set off fully
against the profits or gains.
1153
of any other business carried on by the assessee or against
income under any other head and there is no unabsorbed
depreciation allowance or development rebate to be carried
forward. It is indeed difficult to see how effect can be
given to depreciation allowance and development rebate twice
over, once in the past assessment years and again in the
assessment year in question. To give effect to depreciation
allowance or development rebate for the past assessment
years, even though it has been set off and absorbed
completely against the total income of the assessee for
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those assessment years would be to allow a deduction not
warranted by any provision of the Act and indeed it would be
going, contrary to the express provision of proviso (b) to
clause (vi) and Explanation 1 to clause (vi-b). Sub-section
(3) of section 15C clearly does not have any such effect.
What it does is no more than provide as to how "the profits
or gains derived from new industrial undertaking" referred
to in sub-section (1) of section 15C shall be computed. If
sub-section (3) of section 15C had not been enacted, it
might have been a matter of some controversy as to what is
meant by the expression "the profits or derived from new
industrial undertaking". Does it mean commercial profits or
gains or profits or gains chargeable to tax or does it have
any other connotation? It was to set this controversy at
rest that sub-section (3) of section 15C enacted that the
profits or gains of the new industrial undertaking shall be
computed in accordance with the provisions of section 10. It
may be noted that sub-section (3) of section 15C does not
enact any legal fiction providing that the profits or gains
of the new industrial undertaking shall be computed as if
the new industrial undertaking were the only business of the
assessee from the date of its establishment or the past
years depreciation or development rebate had not been set
off against other income of the assessee. The new industrial
undertaking is not retrospectively quarantined or isolated
from the other income producing activities of the assessee
for determining its profits or gains for the purpose of
applicability of sub-section (1) of section 15C. What sub-
section (3) of section 15C does is merely to lay down the
same rule of computation for the profits or gains of a new
industrial undertaking as in respect of any other business
and, therefore, neither depreciation allowance nor
development rebate in respect of the new industrial
undertaking for the past assessment years can be allowed as
a deduction in computing the profits or gains for the
assessment year in question, except where and to the extent
to which, it has not been set off against the total income
of the assessee for those assessment years and has remained
unabsorbed. This is the plain and undoubted effect of the
language used in sub-section (3) of section 15C. Indeed
1154
the language is so clear and unambiguous that it is
impossible to place any other construction upon it. But
apart from the language of the section, it may be noted that
if the construction contended for on behalf of the Revenue
and upheld by the High Court as well as by the Tribunal were
accepted, it would lead to the highly anomaIous results
that, though, for the purpose of computing the total income
chargeable to tax, the depreciation allowance and
development rebate which have been set off against the other
income of the assessee for the past assessment years would
not be liable to be taken into account, they would have to
be deducted in computing the profits or gains of the
business for the purpose of applicability of sub-section (1)
of section 15C. Thus, there would be two different modes of
determining the profits or gains of the business, one for
computing the total income chargeable to tax and the other
for applying the provisions of sub-section (1) of section
15C. We cannot imagine that such a consequence would ever
have been intended by the Legislature.
We find in the present case from the undisputed figures
on record that the whole of the depreciation allowance of
Rs. 1,44,361/- in respect of the new industrial undertaking
for the assessment year 1959-60 could not be absorbed owing
to the total profit of the assessee being insufficient and a
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sum of Rs. 24,183/- remained as unabsorbed depreciation
which was carried forward to the assessment year 1960-61.
The entire development rebate of Rs. 5,07,336/- also
remained unabsorbed and had to be carried forward to the
assessment year 1960-61. But during the assessment year
1960-61 the total profit of the assessee came to Rs.
14,13,604/- and this was sufficient to absorb not only the
carried forward depreciation of Rs. 24,183/- and the current
year’s depreciation, but also the carried forward
development rebate of Rs. 5,07,336/- and the development
rebate of Rs. 1,17,205/- in respect of machinery installed
in that assessment year. The result was that no part of the
depreciation allowance or development rebate remained
unabsorbed to be carried forward to the assessment year
1961-62. If that be so, it is difficult to see how any part
of the depreciation allowance or development rebate could
possibly be allowed as a deduction in computing the profits
or gains of the new industrial undertaking for the
assessment year 1961-62. It is only if a part of the
depreciation allowance or development rebate had remained
unabsorbed against the total income of the assessee in the
past assessment years that it could be carried forward and
set off against the profits or gains of the new industrial
undertaking for the assessment year 1961-62. But when
admittedly entire depreciation allowance and development
rebate for the past
1155
assessment years were fully set off against the total income
of the assessee for those assessment years and no part of
the depreciation allowance or development rebate remained
unabsorbed, nothing could be deducted in respect thereof and
hence, for the purpose of sub-section (1) of section 15C the
profits or gains of the new industrial undertaking for the
assessment year 1961-62 came to Rs. 1,36,822/- and the
assessee was in the circumstances, entitled to the benefit
of the exemption under section 15C, sub-section (1). We are,
therefore, of the view that the High Court as well as the
Tribunal were in error in refusing the benefit of the
exemption under section 15C, sub-section (1) to the assessee
for the assessment year 1961-62. The same view must also
prevail in regard to the assessment year 1962-63 for, as we
have pointed out above, section 84 of the new Act is, in
material respects, identical as section 15C of the old Act.
The reasoning which has weighed with us must apply equally
in regard to the assessment year 1962-63 and we must
likewise hold that the assessee was entitled to the benefit
of the exemption under section 15C, sub-section (1) in
respect of the assessment year 1962-63 also.
We accordingly allow these appeals, set aside the
judgments of the High Court and answer the questions
referred by the Tribunal in both the appeals in favour of
the assessee and against the Revenue. The Revenue will pay
the costs of the assessee in both the appeals.
S.R. Appeals allowed.
1